7 COMMON TAX MYTHS FOR 2022
7 Common Tax Myths for 2022
The hustle and bustle of tax season has returned as millions of Americans scramble to file their 2021 taxes before the April 18, 2022 deadline. With the flurry of changes and new tax information this year, it can sometimes be hard to discern tax facts from tax fiction. In this article, we shed light on the truth behind seven all-too-common tax myths with Liberty Tax’s own Doug Campbell, Vice President of Tax Support .
Tax Myth #1: Spending more on deductible expenses is a foolproof way to increase your tax refund.
Busted: Increasing your spending on deductible items in hopes of getting a bigger return isn’t foolproof — in fact, you’d have to be a fool to believe it can save you money.
“If you are in a 25% tax bracket, a $1,000 deduction increases your refund by $250… which is great, except it cost you $1,000,” Doug explains.
In other words, yes, you can increase your tax refund. But you will lose money in the process.
“If you have to spend money, make it deductible if you can, but don’t go out and spend it just to get a tax benefit,” Doug adds.
Tax Myth #2: Filing for an extension increases your chances of being audited.
Busted: Despite the prevalence of this myth, the tax professionals’ consensus holds that filing for an extension does absolutely nothing to increase your chances of being selected for an IRS audit. While the audit selection process is somewhat opaque, it is known that the IRS uses an algorithm to compare similar returns to establish a baseline, or “norm.” If your return contains information outside this “norm,” you become an audit candidate. However, filing for an extension is not considered outside of the “norm.”
Tax Myth #3: If you cannot afford to pay your tax liability, you can file an extension to delay payments for six months.
Busted: Unfortunately, there is no truth to this one.
“The only thing an extension does is extend the time you have to file your return,” Doug says. “It does not extend the time you have to pay any tax you owe. If you don’t pay what you owe by the original due date, you may be subject to a failure-to-pay penalty of 5% per month of the amount you owe.”
Tax Myth #4: If you received advance Child Tax Credit (CTC) payments based on the number of qualifying children claimed on your 2020 tax return but didn’t claim those children on your 2021 return, you don’t have to pay any of those advance payments back.
Plausible: “This is actually true in some situations, primarily based on your level of 2021 income,” Doug says. However, suppose your Adjusted Gross Income (AGI) was above $40,000 ($60,000 if filing jointly), and you claim fewer children on your 2021 return than you did in 2020. In that case, you may be required to pay back some — or all — of the advance CTC payments you received, reducing your 2021 tax refund or increasing the amount you owe. And even if your AGI is below the stated threshold, you may lose some of the CTC tax benefits if you claim fewer children on your 2021 return.
“I don’t want to sound like a commercial for tax preparers,” Doug adds. “But sometimes the results of this thing are so [unexpected], it may not be a bad idea to contact a tax professional for assistance.”
Tax Myth #5: Exchanging cryptocurrency for another kind of cryptocurrency is considered a like-kind exchange and thus, is non-taxable.
Busted: While like-kind exchanges certainly exist, crypto does not meet the criteria. For tax purposes, the IRS treats virtual currency as property. Think of cryptocurrency like stock — selling Apple shares to buy Walmart shares is undoubtedly not a like-kind exchange, for example. Neither is exchanging Bitcoin for Ethereum.
Tax Myth #6: Cryptocurrency received in exchange for delivering goods or services is not subject to taxation.
Busted: “Not true,” says Doug. “Again, virtual currency is treated [as] property for tax purposes. Any property received in exchange for goods or services is taxable — not as a capital gain, but as ordinary income, like wages.”
Tax Myth #7: If you owe taxes after filing your return, you shouldn’t file your return until the date it’s due to minimize loss due to interest.
Busted: Waiting until the last second to file is a recipe for disaster — and in this case, it may not even be necessary.
“Everybody knows about direct deposit,” Doug says. “If you owe additional tax, you can have the IRS do a “direct debit” — kind of a reverse direct deposit. You can have the IRS withdraw your amount due directly from your bank account, [and] you can also tell them when to do it. For example, if you complete your tax return in March, go ahead and e-file it, but tell the IRS to withdraw the money on April 18, 2022 — the due date for filing your 2021 tax return.
Having TAXiety? We Have the Answers.
It’s no secret — taxes can be a challenge to understand. If preparing for this year’s tax season gives you TAXiety, don’t hesitate — schedule an appointment with your local Liberty Tax Practitioner. Let the tax pros at Liberty Tax be your tax resource.